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General Electric vs. Westinghouse in Large Turbine Generators<br />  Önder BARLAS<br />   Executive MBA Student<br />   Boğaziçi University, Istanbul<br />Abstract: This position paper aims to give short information about the” General Electric vs. Westinghouse in Large Turbine Generators” case by HBSP. Porters Five Forces Model will be used to analyze the competition in the large turbine generators market.<br />305671517243500357415306800<br />,[object Object],Electrical power stations use large steam turbines driving electric generators to produce electricity. Most central stations are fossil fuel power plants and nuclear power plants; some installations use geothermal steam. After WWII, with increasing production, the demand for energy increased. The large turbine generator industry in early 1963 experienced severe price cutting and depressed industry conditions. Due to the unusual conditions, that this market offered, only two companies competed with each other to gain a slice from the pie.<br />,[object Object],Entry Barriers:<br />Situation: First of all, the entry barriers for new entrants were high, as the production of a large turbine generator needed state of the art expertise backed with special equipment. Second, there were no mass production practices for turbine generators as major modification in most of the parts were needed in each project. <br />Comment: A firm which aims to penetrate into this kind of market needs to be ready to spend excessive cash for R&D and human capital. Also it needs to own sufficient cash to finance the costs during the manufacturing process as cash inflows from the utilities could differ. Also there is no constant demand and forecasting requires expertise. Therefore the best solution to break the entry barrier is to buy a company, which will result know-how transfer. Allis Chalmers seems to be a perfect candidate for this kind of approach. For firms coming from abroad and who already possess certain know-how in this business, quality and cost leadership would not be sufficient. They need political back-up (lobbying). As the case states there were two foreign firms (Brown Boveri and Parsons, which tried to penetrate in the US market and had limited success (13.3 % share in 1959).<br />Bargaining Power of Suppliers:<br />Situation: Material costs presents about 35% of the revenue. <br />Comment: It can be assumed that suppliers in this kind of oligopoly have less bargaining power as they are dependent on GE’s and Westinghouse’s purchases. <br />Bargaining Power of Customers:<br />Situation: There are two major customer clusters in the market: Government-owned utilities (GOU) and investor-owned utilities (IOU). From the top 25 utilities 24 of them are investor owned. Government utilities follow a formal procedure whereas investor owned utilities negotiate to reach the lowest price offering the most value added services.<br />3040949-36628600<br />GOUIOUBiddingSealed bids for all1-1 negotiations with eachPrice InformationPublicly postedIncomplete ,never publishedPricingLowest price  wins the contractPrice is a bundle of product and services and should be lowest as possible<br />Comment: In this kind of industry knowing each other’s bids is a key variable. As price is the key issue in all negations, complete information is the way to success. <br />According to the Game Theory there are the following options. <br />GE/WestinghouseHigh PriceLow PriceHigh Price0,00,1Low Price1,01,1<br />As seen above the Nash equilibrium for this market is to offer the lowest prices. <br />The large reserve capacity also allowed utilities more bargaining power in negotiations and they could command higher discounts to book prices. This can be easily noticed by the low Return on Sales values of GE and Westinghouse between 1958 and 1962. Continuous discounts leads to an eruption of profits. In such an oligopolistic environment heavy competition can cause zero economic profits and existing firms such as Allis Chalmers needs to leave the market, whereas the low profit margin acts as an entry barrier itself: Firms are unwilling to penetrate in such a market. <br />Substitute Products:<br />Situation: There is no sufficient data about substitute products<br />Comment: A substitute product could be an arch dam, which is a barrier that impounds water or underground streams. Hydroelectric power comes from the potential energy of dammed water driving a water turbine and generator; Dams do not use turbine generators; they have their own type of generator design.<br />Rivalry between existing Firms:<br />Situation: The major issue in the process of competitive rivalry in an oligopoly market is that conditions for avoiding conflict are difficult to reach. <br />Comment: GE focused on large turbines that had lower-per megawatt costs than Westinghouse. This was an important consideration for buyers who were larger, and could justify the higher costs with per unit sales. GE had a large competitive advantage in the large turbine industry for four main reasons:<br />,[object Object]
Competence on larger, more technologically sophisticated units
Status as a price leader in the market

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GE - Westinghouse Turbine Industry

  • 1.
  • 2. Competence on larger, more technologically sophisticated units
  • 3. Status as a price leader in the market
  • 4.
  • 5. Both firms need to focus on standardization of manufacturing processes and equipment. Direct costs should be decreased by negotiating with raw materials suppliers.
  • 6. 3104011-649044400After the excess capacity is used, GE and Westinghouse should share the market. Although it could be seen as a move for tacit collusion, GE should only focus on large generators and Westinghouse on medium/small. They should not interfere with each other. Less competition in the shared market segment could make the utilities dependent on their products and profit margin could be increased as the market will turn to monopoly.
  • 7.